Push Into Food, Power Plants Paying Off for Japanese Traders

Japan’s trading houses were key to the revival of the country’s postwar economy as they scoured the planet for the coal, oil and metals needed by industry.

They still play a similar role, though earnings in the past week show a shift into supplying food and utility services, such as power and water plants, is paying off. And they’ve expanded beyond Japan into other countries, especially China, with the home market accounting for just about half of sales today.

Marubeni Corp., the biggest seller of soybeans to China, posted record profit in the three months ended June. Itochu Corp. saw net income jump 13 percent on higher food sales to the same country and rising profit at its partly-owned convenience store chain FamilyMart Co. Lower income from gas, coal and iron ore saw profit slide for Mitsui & Co. and Sumitomo Corp.

Mitsubishi Corp., the biggest general trading house, which are known as “sogo shosha” in Japanese, said profit fell 17 percent last quarter as oil, gas and coal sales among other hard commodities delivered 43.4 billion yen in net income, down from 64.4 billion yen a year earlier.

The company’s non-resource profits rose 5 percent to 68.1 billion yen on returns from fund investments, animal feed and livestock earnings, and power generation in North America.

Other Markets

Earnings at the traders in the last quarter continue a trend that’s rewarded companies that invested more aggressively outside of mined commodities including coal and iron ore.

While profits outside hard commodities are “covering” for the slump in Mitsubishi’s Australia coal business, a recovery in the price of the mineral used in steelmaking is “later that we initially thought,” Chief Financial Officer Shuma Uchino said in Tokyo today.

Compared with five years ago, Marubeni, which owns the most electricity capacity among the trading houses, has seen first quarter profit double, as has Sumitomo Corp., whose key earning areas include media and construction.

Power projects, which includes Marubeni’s investment in Middle East, South East Asia and North American generators, accounted for 15 percent of the trader’s 69.1 billion yen profit in the last quarter. The ratio of net income from businesses outside of resources such as oil, gas and coal grew to 84 percent in the quarter, from 71 percent over the last fiscal year.

Other Earners

Profits from machinery units, which includes power plants, at Itochu and Mitsui also posted gains last quarter compared with a year earlier.

Itochu, which paid $1.3 billion last year for Dole Foods Co.’s canned fruits and Asian grocery business, has quadrupled profit in the same period. By comparison, Mitsui, whose profit has remained tied to trading minerals such as iron ore and coal, has improved first quarter net income 25 percent over the five years.

The shift seems timely as the commodity boom of the last decade deflates.

Almost all of Japan’s major traders saw profits from mining decline, with Sumitomo’s net income down 14 percent last quarter, compared with a year earlier, mainly on lower coal prices and the costs associated with nickel assets. Mitsui’s profit slipped 4 percent as the decline in energy and mining earnings was partly offset by a lower tax bill.

The global credit crisis that started in the U.S. in 2007 and the ensuing sovereign credit failures in Europe, coupled with the slowdown in China’s economic growth have eroded demand for minerals. China’s government has cut overcapacity in industries such as steelmaking, depleting demand for iron ore and other mined minerals.

Price Questions

Iron ore is in “persistent oversupply” and may drop to $80 per metric ton next year, Goldman Sachs Group Inc. analysts Christian Lelong and Amber Cai said in an Aug. 6 report. The mineral is currently shipped at about $95 per ton, they said.

Mitsui Chief Financial Officer Joji Okada said yesterday that he’s confident the slide is already at an end.

“They’ve bottomed out,” Okada told reporters in Tokyo, without giving a price forecast. Iron ore is the only commodity Mitsui trades for which it does not publicize its outlook.

“At the moment, the non-resource businesses are more in the limelight, but you never know what is going to happen with commodity prices,” Thanh Ha Pham, an analyst with Jefferies Group LLC in Tokyo, said by telephone.

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